How To Manage Your Money When You Have Inconsistent Income?
As an entrepreneur you probably have experiences the ups and deep downs in your cash flow. Inconsistent income is the rule unfortunately…
The good news are: there is a simple solution to that!
All you need to do is to create a routine and allocate your money in a way that you can pay all your bills, pay yourself and still make a profit.
There is a method to it though…
Create Your ‘Money Containers’
One way of having a clear picture of your business is to classify your transactions so that you can allocate them into different ‘Money Containers’ as follows:
1.Revenue 2.Direct Costs 3.Operational Costs 4.Owner’s Salary 5.Taxes 6.Profit
As you make sales you move the money into the different pots ensuring that you will always have money for all the things you need.
Review Your Costs
Have a look at your costs for the last 3 months.
It is important to understand which of your costs are ‘direct costs’ and which are ‘operational costs’ and classify them accordingly.
I explain below with examples but these are not set in stone, it will depend a lot on your industry and your business model.
The most important thing is to understand the principles of and that will help you distinguish them in your own business.
Why is it important to have this distinction? Because we want to compare each of your income streams to its related direct costs to understand how profitable each one truly is.
Launches are a good example because depending on how elaborated they are by the time you paid design work, ads, support, etc you may see that a lot of that revenue is already committed.
Therefore you want to have a very clear picture of sales vs direct costs and what is left.
Direct costs are cost incurred as a results of you making a sale, for example PayPal fees or, for example if you a web designer and outsource some of the design work your direct costs are your subcontractor costs.
They can also be costs that you need to spend in order to make sales, for example if you are launching a program and you are running Facebook ads to promote it.
Operational costs are the running costs of your business.
They can be further divided into fixed or discretionary.
The fixed ones are the ones that incur every month regardless of whether you make any sales.
Things like your broadband and software bills.
The discretionary costs are the ones that you have some flexibility and you can decide to postpone in case you are having a slow month, things like events, VA support, etc
Create a 90 Days Projection
Put together a projection of what you think it is going to happen in the next 90 days.
Start with the revenue: What projects will you be working on? Are you planning any launches?
How many new clients are you planning to enrol?
Next are your Direct Costs: What costs will you need to incur in order to generate the sales that you projected? Any marketing or advertising costs, any design or copywriting costs, etc.
Next are the Operational Costs:
What are the fixed costs that you need to run your business and that you don’t have much flexibility on in the short term?
What are the other costs that you are incurring currently which are discretionary and you could cancel or move them if you did have a slow month and also which other costs do you think you will need in order to cope with the projected revenue, i.e. VA support or new software.
This process alone will give you great clarity on what you need to do to achieve your goals but the fun is yet to come…
The Percentage Game
Now that you have your figures the next thing is to see how they compare to each other.
The idea is to compare each Money Container to each other and see whether you are making the best use of the money that comes into your business.
From your sales figures deduct your direct costs. The percentage of what is left will depend a lot on your business model.
The amount left is what you have to allocate to the other Money Containers: Operational Costs; Owner’s Salary; Taxes and Profit.
Aim to the following percentage (for business up to £200K and with less than 2 employees):
Operational Costs – 30%
Owner’s Salary – 50%
Taxes – 15%
Profit – 5%
So every sales you make, take out the direct costs and what is left allocate as per the above.
Leave the amounts for Direct and Operational costs on the account and move the rest to a different account this way you won’t spend it by mistake.
Remember, there are always things to spend money on!
If you find that by doing that you won’t have enough to pay for all your expenses, this is a sign that you need to review them and really look into whether you need all of those things.
A business that doesn’t pay you and that doesn’t make a profit is not a healthy one.
By keeping to these percentages you will ensure that you always have money for everything you
need and that you are actually paying yourself month after month.
I hope you found it useful!
If you find that you need help on implementing this in your business you can book a complimentary call with me and we can go through this in your own business.
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